Wherefore Ports of Auckland?

Ports of Auckland (POAL) growth plans have been built unquestioned into Auckland Council's economic development strategy for Auckland. These assume a further 20 hectare reclamation into Waitemata Harbour and a raft of supporting public infrastructure. Just what assumptions underpin these plans, and do they stack up against international best practice? Auckland Council's economic development strategy calls for "an average annual real GDP increase greater than 5%"; POAL has stated that its growth plans assume a 5%/annum growth rate in container traffic (in 2010 POAL reports 890,000 container movements) NB: POAL's strategy paper states: "Shipping industry rule of thumb is shipping volume growth = 2.5 times GDP growth..." If Auckland accepts POAL's stated rule of thumb, and Auckland Council's aspiration of 5% increase in GDP/year, then we are looking at a need to increase POAL's freight handling capacity by around 12.5%/annum. Rather more than 5%/annum. I have researched industry trends and issues reported internationally about the management of port freight handling infrastructure. In this posting I provide extracts which I think throw light on what is happening in Auckland. First of all a few extracts from a 2003 report: CONTAINER PORT PRODUCTION EFFICIENCY by: Teng-Fei Wang, Dr Dong-Wook Song, and Prof Kevin Cullinane: "Container terminal production is both an important and complicated element in the contemporary global economy… Standing at the crucial interface of sea and inland transportation, the significance of the container port and its production capabilities cannot be ignored. Compared with traditional port operations, containerisation has greatly improved port production performance.... To reap economies of scale and of scope, liner shipping companies and container ports are respectively willing to deploy dedicated container ships and efficient container handling systems. In so doing, port productivity has been greatly enhanced. On the other hand, many container ports no longer enjoy the freedom yielded by a monopoly over the handling of cargoes from within their hinterland. They are not only concerned with whether they can physically handle cargo but also whether they can compete for cargo. This inter-port competition, under the orthodox microeconomic framework, is believed to provide an incentive to improve port performance... Under such a competitive environment, port performance measurement is not only a powerful management tool for port operators, but also constitutes a most important input for informing regional and national port planning and operations..... A couple of important concepts are introduced in this extract. The first is that because a lot of trade has been "containerised" - ie that everybody has agreed to adopt the same technology - there is no longer the opportunity to compete by adopting a different shipping technology. All container ports have the same equipment more or less, and do the same job. More or less. As far as a ship full of containers is concerned it doesn't matter which port it goes to. They all look the same. The second concept is "hinterland". This word is used to describe the transport networks on land that connect the port with the ultimate destination or source of goods. Hinterland refers to road and rail networks and suchlike. POAL strategic planning documents are concerned chiefly with the "whether they can physically handle cargo" dimension mentioned in the extract above. So. If GDP increases, so does the number of containers, and so therefore POAL will need more land and more cranes and more berth space to handle that increased traffic. POAL do mention that there will also be requirements to increase the capacity of road and rail infrastructure, but this is not quantified. Consistent with its concern about "whether they can physically handle cargo", POAL provides information about its container handling capability, compared with Melbourne and other Australian ports. This sort of comparison is extensively referred to in other reports. For example, in: MEASURING PORT EFFICIENCY: AN APPLICATION OF DATA ENVELOPMENT ANALYSIS, by: Geoffrey Poitras, Jose Tongzon and Hongyu Li, we read: "A number of different measures of port output are available, depending on which features of port operation are being evaluated. This study uses two output measures. The first output measure is the total number of containers loaded and unloaded. In addition, because the container handling aspect of port operation constitutes the largest component of total ship turnaround time, the speed of moving cargoes off and onto ships at berth, measured as the amount of cargo handled per berth hour, is the second measure of port output selected. Improving efficiency in this area is consistent with port authority intentions of maximizing berth utilization, a factor which will influence both port charges imposed on shipowners and the actual throughput handled..... Conclusions: Available studies of port efficiency have not provided a satisfactory answer to the problem of making efficiency comparisons across ports. With considerable success, this study applies DEA analysis to evaluate relative port efficiency. The efficiency results obtained depend on the type of DEA model employed which, in turn, depends on an assumption made about the returns to scale properties of the port production function. If a linear technology is assumed, then three of the five Australian ports examined are found to be inefficient in a 1991 sample of 5 Australian and 18 other international ports. One Australian port, Fremantle, is found to be the most inefficient port in the sample using both constant or variable returns to scale assumptions. Two Australian ports, Sydney and Brisbane were found to be efficient independent of the returns to scale assumption, indicating that port size alone is not the primary determinant of port efficiency. I have included this extract here simply to illustrate that a lot of energy does go into this sort of analysis. POAL subscribes to this approach, and much of its justification of how well it is doing, and so on, is based on its container handling performance. The problem with this approach is that it is narrow, and does not engage with the broader idea of "hinterland" or of "competition" itself. A helpful view of these matters is available in a 2009 report by the OECD – International Transport Forum, part of its JOINT TRANSPORT RESEARCH CENTRE. The report is entitled: PORT COMPETITION AND HINTERLAND CONNECTIONS. Extracts from this report follow: "...Maritime freight transport has experienced strong growth and profound change over recent decades. Freight volumes and container traffic in particular have grown with the intensification of global trade and the geographical dispersion of production. The industrial organization of the sector has evolved rapidly. These changes have rendered the ports business environment more challenging. Many agents along the supply chain have engaged in horizontal and vertical integration of activities. This has lead to more efficiency in the movement of cargo, but has reduced the number of players, with an attendant risk of abuse of market power. The market power of the ports vis-à-vis shippers and shipping companies has become correspondingly weaker. The critical ideas that are introduced here include the idea of "supply chain" - that is the origin-to-destination path, or maker-to-user or producer-to-consumer pathway, of a good. The second idea is that a Port is just one link in that supply chain. This is a serious issue for POAL and for New Zealand as this further extract explains: "...Containerization was a major technological innovation that revolutionized the nature of maritime-based freight transport of manufactured goods. It caused a substantial degree of standardization of port services, implying that ports cannot rely on specialization to maintain market share and generate revenues as much as they used to. With containerization, ports in the same region become closer substitutes, and hence are more exposed to competition from other ports and other routes. This tendency is reinforced by two other factors. First, the use of ever larger container vessels implies that fewer port calls are required for the same freight volume. This move to larger ships reduces shipping lines’ dependence on particular ports and intensifies competition among ports for the remaining calls (assuming each port can handle the larger vessels). Second, the emergence of intermodal rail and barge corridors has extended gateway ports’ geographical reach. The extension of hinterlands leads to more overlap among ports’ hinterlands and hence to stronger competition. This extract describes what we observe in the competition between POAL and POT (Port of Tauranga). The "hinterland" transport networks on land (roads, state highways and railways, and even "inland ports") for Auckland, Tauranga and Northport overlap. And for many goods they overlap extensively, which is why from a supply chain point of view, from exporters' point of view, it doesn't really matter whether the goods are trans-shipped by POAL, POT or NorthPort. This is a profoundly important point. Owners and operators of individual competing ports are forced to do whatever they can to cut costs and speed up service, so that their contribution to the overall supply chain cost and service level keeps them in contention by exporters who are keen to buy export services from the lowest provider. This driver has all sorts of side effects, which the report goes on to describe: "...Local communities near mega-port sites are confronted with the adverse impacts of increased port throughput. Port-generated traffic contributes to congestion on transport networks, and to safety risks, noise, and local air pollution. As incomes in these communities grow, sensitivities to these side effects grow as well. From a public policy point of view, the question is: are these side effects excessively high? The answer is yes, in the sense that congestion and air pollution are external costs, i.e. they constitute real costs for local communities (as well as for port traffic) that are often ignored in decisions regarding port and hinterland traffic volumes. There are other side effects in Auckland of an expansion of POAL activities - for example dredging, reclamation into the City of Sails playground, and obstruction of view corridors. However, if POAL does not expand then the report has this advice: "...When a port or its hinterland facilities are more strongly congested than is the case for competing ports, the quality of that port’s service may be lower in that it takes more time to access and egress the port and the reliability of service declines, and this weakens its competitive position.... Just a quick digression here into Auckland's "hinterland". Specifically rail. The POAL plan suggests "as much as 30%" of container movements could be by rail. That sounds not very much to me. We should get as many of these container movements as we can onto rail - rather than trucked by road. Let's assume 50% and consider the implications of POAL's growth plans. The 5% POAL growth strategy would mean the port would be handling about 3,600,000 container movements per year in 2040. About half of these are ship-ship movements - ie POAL acts as a hubbing port for other ports. The other half are distributed by road and rail. Assuming half of these are moved by rail, that means 900,000 containers are moved by rail. What would that mean for Auckland's "hinterland"? Well. All of these container movements have to use the North Island Main Trunk Line NIMT - which takes them through the residential areas of Orakei, Panmure and Glen Innes. Trains through these areas travel slow, at about 30 kph. What does it mean for the local environment? Well. 900,000 containers carried by train over a year, each about 10 metres long (allowing for gaps between containers and rail trucks), would require 30 trains a day, each about a kilometre long, to get these 900,000 containers through that bit of Auckland's hinterland. If trains ran with a 5 minute headway between each train, POAL container trains would run for 3 and a half hours each and every day of the working year (estimated to be 300 days) through Panmure and Glen Innes etc. And if that matter isn't a concern, then POAL's strategy of becoming a gateway port (in competition with POT) should be, as the paper goes on to explain: "...One consequence of the drivers of change in the organization of supply chains is that gateway ports have in many cases become a replaceable element of the chain, with relatively weak bargaining power. A port that provides service of a given quality at the lowest price does not necessarily gain market share, as other factors – that are not under the port’s control – also affect port choice. The focus shifts from port performance to supply chain performance. Among the other factors, hinterland transport costs have become relatively important, as the cost per kilogram per km on the hinterland is 5 to 30 times as high (depending on the hinterland transport mode) as the maritime shipping cost. Routing choices, and to some extent port choices, are strongly dependent on hinterland transport conditions, and reliability of the total route has become increasingly important to those in the supply chain making the routing decisions. So. Spending up large on POAL reclamations will not guarantee that POAL is favoured as a gateway port - especially if road and rail conditions are congested and expensive. Two further points from this OECD paper: ...authorities need a vision on the likelihood and the desirability of continued growth in volumes and geographical span of supply chains. Until recently, the general expectation was one of further fast growth of freight volumes within the current geographical pattern of “globalization”. This expectation has triggered massive investments in transport infrastructure. However, it is not straightforward that this expectation will be realized. Rodrigue (2008) argues that containerization has matured so that future growth rates are likely to be lower than in the recent past. In addition, the medium term economic outlook implies moderate growth, translating in limited or even negative growth in traffic.... ....ports aim to maximize throughput, and can do so by charging low prices for the use of infrastructure and dredging that is often publicly provided. The consequence is that shippers and supply chain operators do not face the full cost of infrastructure, let alone the full social cost of their decisions. Transport infrastructure pricing structures that do not reflect marginal costs, including externalities, in the hinterland exacerbate these problems. More cost-based pricing approaches are likely to improve the balance between overall costs and benefits of port and supply chain activity, and may result in growth rates below those observed in recent decades. I think this extract underlines a significant concern that Auckland public has about POAL and its strategy, and that is POAL's assumption that shippers are able to avoid paying the true costs of the supply lines that are used - of which POAL is but a fraction. (An example: if you want to ship a container out of Auckland from Hamilton, the trucking charge to pick up the container - to be no more than 24 tonne - in Hamilton and deliver to POAL is quoted at around $700. While the current POAL charge to load the container on to a ship is just over $200. Shipping charges are additional, as are off-loading costs at the destination port, and local land transport costs.) Finally there is the matter of Air Freight - as opposed to Sea Freight. It is a significant policy matter if Auckland Council decides to subsidise freight out of Auckland via POAL, enabling POAL to establish a dominant trade position over Auckland International Airport, and thereby enhance revenue stream from POAL in which it has a 100% stake. You might think this is a red herring. But in fact Air Freight is carrying more and more exports and imports, as explained in a report: TRANSPORTATION COSTS AND INTERNATIONAL TRADE OVER TIME, by authority David Hummels. "Why has air transport grown so rapidly? … a major factor has been a sharp decline in the relative cost of air shipping. Less obviously, but perhaps as important, that a dollar of merchandise trade goods weighs much less today than in previous years. From 1960-2004, the real value of trade in manufactures grew about 1.5 percent per year faster than the weight of non-bulk cargoes.... A fall in the weight/value ratio of trade leads to more air transport for two reasons. First, the marginal fuel cost of lifting a 100 kg package into the air is considerably higher than the cost of floating it on water. Second, consumers are sensitive to changes in the delivered price of merchandise, not to changes in the transportation price. If transportation is but a small fraction of the delivered price, then when choosing transport mode the explicit costs of transportation may be trumped by implicit costs such as timeliness or reliability.... The International Air Transportation Association surveys international air carriers and reports worldwide data on revenues and quantities shipped in their annual World Air Transport Statistics (WATS)... Expressed in 2000 U.S. dollars, the price for air freight fell from $3.87 per ton-km in 1955 to under $0.30 from 1955-2004.... Ocean liner service itself has become much faster than in years past, both because the ships are larger and faster, and because their loading and unloading time is dramatically lowered by containerization. But even after these improvements ocean shipping is still a slow process. Shipping containers from Europe to the U.S. Midwest requires 2-3 weeks; from Europe to Asia requires five weeks. In contrast, air shipping requires a day or less to most destinations. Consequently, the 10-fold decline in air shipping prices since the late 1950s means that the cost of speed has fallen dramatically.... Changes in international transportation in the second half of the twentieth century are more than just a story of declining costs..... between 1955 and 2004. As a result air shipping grew in this period from an insignificant share of trade to a third of US imports and half of US exports outside of North America.... Economic historians have argued that technological change in ocean shipping was thecritical input to growing trade in the first era of globalization during the latter half of the 19th century. I would argue that technological change in air shipping and the declining cost of rapid transit has been a critical input into a second era of globalization during the latter half of the 20th century. Air freight is clearly growing, and more and more goods - especially high value and freshly grown goods - are travelling by air. Auckland International Aiport is well on the way to constructing a second runway. These - and the matters set out above - are among those that need to be considered by Auckland Council, before it rubber stamps POAL's growth plans.

Submission: Economic Development Strategy

Introduction Auckland faces challenges because of its geographical remoteness (which is also a strength), small local economy (which produces independent and confident children), and small scale of businesses (which is useful in building start-ups which can then spread internationally). These words are partly drawn from the Auckland Council Draft Economic Development Strategy document section: Where Our Challenges Lie (Pg 27), which is the most honest and clear section of this narrowly focussed document. The document starts with a broad vision (Page 4), which then gets narrowed on Page 31 to a vision which requires: “…a step change in exports and internationalisation…” No other economic development visions are articulated. A vision based around a “step change in exports” necessarily involves an expansion in Port facilities. However there are other economic development visions which are not considered in this strategy. There are significant costs and dis-benefits associated with this single economic development vision, because of its narrow emphasis on Port expansion, which have not been articulated in the present draft economic development strategy. The following submission primarily relates to the Ports technical document entitled Waterfront Plan_Working Paper-Port (WPP). New Zealand needs a National Port Strategy – before Auckland agrees POAL's expansion plan There are many acknowledgements in the WPP of the infrastructural issues confronting New Zealand Inc of proceeding with uncoordinated development of New Zealand container handling capacity. That risk is container handling capacity in every port, price-cutting competition in every port, massive duplication in investment, and exporters and shipping companies laughing all the way to the bank. Section 4.2 of the WPP admits to: “Potential for duplication of infrastructure if investment is not co-ordinated…” This is a major problem for New Zealand and for Auckland. Arguably, the cost of port infrastructure is at least as important as roading infrastructure, whose development is closely coordinated by New Zealand Transport Authority. The WPP states at Pg 9 “…there is intense competition for container trade between POAL and Ports of Tauranga (POT)…” I can atest to that from my experiences as a Councillor on Auckland Regional Council (which owned POAL through its subsidiary Auckland Regional Holdings while I was a councillor from 2004 to 2010.) I received regular confidential reports outlining the negotiating strategy which was pursued by POAL and ARH, in the price war that emerged between POT and POAL in trying to gain the Maersk contract which was heavily driven by Fonterra’s desire to drive down the costs of its milk fat freight logistics supply chain. Their priority had no regard for the public cost of meeting that objective. The final price that was offered by POAL to Maersk was little more than $200/container, close to cost, and significantly lower than the handling charges over the Tasman which were nearly twice that. I well remember the justification for this cut-throat price from those in support of it: “it’s all about volume…”. However, whether it’s one million containers/year, or two million containers/year, the mathematician in me is acutely aware that one million times bugger all is still bugger all. The subsidy is born by the owners of POAL, and by those who need to share the transport corridors with all of these containers - many of which are empty, and by those of us who believe the uses of the Waitemata should be very carefully balanced. The WPP notes the existence of an ARH report prepared in 2009 which calls for: “a need to rationalise our port sector expansion, adopt a coordinated approach to infrastructure planning…”.

Submission 1: A partnership with central government and other New Zealand ports be established to rationalise port sector expansion and adopt a coordinated approach to port infrastructure planning.

Queens Wharf too short for Queen Mary II

Auckland Regional Council's hastily planned Queens Wharf Cruise Ship Terminal would be too little for big ships like Queen Mary II. Don't support it. Don't build it. Auckland needs a big picture waterfront vision - not another short-term embarrassment. This is a case of: "build it and they won't be able to come...." There's a lot of pressure being exerted on Auckland right now, to gain support for this pet project, by ARC's Chairman Mike Lee and his bag man the Hon Murray McCully. They've whipped up support from a bunch of Auckland Mayors (Harvey, Williams and Brown). None of these mayors have a mandate from their councils. None of these mayors have put any public money into this project. None of them have been as immersed in the waterfront as Auckland City Councillors and Auckland Regional Councillors - let alone the Mayor of Auckland City Council. Stop Press 1: Rumour has it that certain Govt Ministers are so keen on this they have offered ARC a $100 million loan to do it. But the loan would be a charge on the new Auckland Council. No free lunch here - ratepayers could be paying for this short-term pet-project for years. And, wait for it, there are suggestions that any Coastal consents needed by ARC for this project could be rushed through Parliament with the next round of Resource Management Act changes. Imagine that! Wouldn't you like that sort of support for a factory farm in the McKenzie Basin! Stop Press 2: Auckland's Heart of the City organisation is also concerned about these proposals. You can support their campaign and get your views across by completing their Queens Wharf is a Mistake survey at: http://www.hotcity.co.nz/takeover/ Here's a few Q&As lurking in public minds: Q: Surely we need to get on with it and build something on Queens Wharf. Otherwise it's paralysis by analysis? A: That statement is not supported by Auckland's recent waterfront history. The Princes Wharf debacle (cruise ship terminal and Hilton Hotel), got consent and construction commenced a matter of months after it became surplus to POAL requirements. Construction started on North Wharf at Wynyard Quarter not much more than two years after it came into public ownership, and before land use plan changes have been settled. Its roaring ahead. And the Viaduct development got consent and was built, as planned, in time for America's Cup. BTW - Queens Wharf has not yet shifted into public ownership. That happens this April. Any suggestion that Auckland waterfront development is slow, or delayed, is a lie. Q: Doesn't Auckland needs a cruise ship terminal and it needs it now, otherwise the city and region will forgo economic benefits? A: In fact the recession has hit the cruise ship industry. I understand that previous schedules suggested there would be about 60 cruise ship visits in the current season. NZ Herald has reported this has been revised down to 47. Even so, as we see today and yesterday, Auckland still gets 2 cruise ships at once and needs places to berth them. This happens now on Queens Wharf, or - in the case of bigger cruise ships like Queen Mary II, they have to berth at the POAL container wharf. So. A new improved cruise ship terminal would be preferred by the industry, but the facts are the ships still come, and they still berth, and the benefits are still evident - even without a fancy new terminal. We do need to plan better for cruise ships, but we don't need to take out the one remaining downtown wharf for that. Q: Doesn't Auckland need a "world class" cruise ship terminal building on Queens Wharf that has iconic architectural character? A: Actually, neither Auckland, nor the cruise ship industry require a "world class" and "iconic design" cruise ship terminal. We just need something fit for purpose, and in a sensible place that does not compromise other waterfront activities and public opportunities. This could be achieved by a relatively simple, two level building, of unexceptionable design. The ideal location for both wharf space and building is Ferguson Terminal. Q: A cruise ship terminal on Ferguson Terminal would take 10 years + to negotiate with Ports of Auckland Ltd. It will never happen. The fight with business that rely on POAL would never end? A: Again. Hardly a question. More of a rhetorical statement. Auckland's whole of waterfront planning needs to include the POAL. Auckland's Ports facility is running at a loss now. It is not the cash cow it once was. Not quite run into the sea - but not the success it was. This part of New Zealand is "over-ported" - what with Ports of Tauranga and Marsden Point (both deep water ports with huge land areas for cargo and container storage). Auckland no longer needs to subsidise the low cost container freight aspirations of POAL - about 1,000,000 a year - at very low cost (only the shipping companies and exporters & importers win) - while Auckland has to look at walls of containers on its waterfront and tolerate lines of trucks on its local roads and state highways driving empty containers from A to B. Time for an integrated change. Time to rethink POAL container wharves AND allow serious public amenity and activity and provision on Auckland's waterfront. Something like Wellington. Q: But isn't it too windy on Queens Wharf. Aren't we kidding ourselves that people will want to "play" on Queens Wharf - after all - it's only a wharf? A: You only have to remember what the weather has been like in Auckland over December and January. It was magnificent with gentle westerly breezes. The beaches were packed. The CBD waterfront was not - of course - because there's nothing there for people to do. It's a myth that Auckland's waterfront is too windy/weather too bad for a public playground on the CBD waterfront. Again - look at Wellington's waterfront. Packed with people even in bad weather. Think of Queens Wharf as being part of a CBD waterfront promenade - with amenity and activity (like a market, like some places to sit and watch - without a waiter hovering, areas to read and enjoy some peace at lunchtime, places to take your sandwiches during a fine day....) Q: Shouldn't the waterfront be about economic activity, about the bustle of business, the banging of containers and ship anchors, and the rustling of cheque books and money? A: Many world city waterfront have been just like that, but large areas have changed to let people back to their waterfronts. Auckland is ripe for this. As POAL get ship-shape, it's time for Auckland's citizens to reclaim their waterfront for some fun....